NAB Monthly Business Survey – June 2015

Business confidence lifted again in the month of June – the highest level since September 2013. Confidence is now positive in all industries except mining and business conditions improved even more, in June – the highest level since last October.

Key Points:

Firms appear to have shrugged off risks in the global economy as the business environment continued to improve into June. While there were some unexpected variations across industries, business confidence lifted again from +8 to +10 index points in the month – the highest level since September 2013. Confidence is now positive in all industries except mining, which is currently zero.

Business conditions improved even more, lifting 5 points to +11 index points in June – the highest level since last October. Improvements in both confidence and conditions over recent months are starting to suggest a more convincing turnaround in the non-mining sectors is underway. Nevertheless, a number of hurdles remain. The more sluggish rise of the employment component is a concern, but the other components (trading and profits) have been strong for a number of months. Conditions still vary greatly across industries as the service sectors continue to outperform. The ‘bellwether’ wholesale industry eased a little and remains at weak levels. Nevertheless, it is encouraging to see leading indicators improve, including forward orders and capacity utilisation.

Given ongoing concerns over sluggish non-mining investment, and following a recent RBA bulletin article into the issue, this month we asked firms a new question on the anticipated rate of return they require before committing to a new investment (the hurdle rate). Hurdle rates tend to be slow to adjust, which can impact the potency of RBA rate cuts. Indeed, the average hurdle rate reported by firms was more than 13%, which is extremely high in the current low return environment. Hurdle rates also vary by industry (see p4 for details)

Our Australian economy forecasts for GDP are unchanged. Domestic demand is still weak, but near term data have strengthened. A better starting point means unemployment will peak lower than previously expected (around 6¼%), but will remain elevated. Our forecasts suggest no more cuts from the RBA. While recent global turmoil (especially in Chinese equity markets) present some downside risk, the strength of local data suggests upside risks. Hence we still see the next move in rates as up – but not till late 2016 (with a terminal cash of around 3.5%).

The Chinese share market correction and concerns that Greece could exit from the Euro-zone have raised both financial market volatility and the downside risks to (already sub-trend) global growth. Unlike the IMF, we are not expecting much of an acceleration in the pace of global growth through the next few years and recent partials do not provide any evidence of this either. Soft economic outcomes across much of East Asia and Latin America, the trend slowing in China and the lack of growth momentum seen in recent Indian data are weighing on global growth, as these economies have been the main drivers of output increases in recent years.

On Australia, we have not changed our activity forecasts – 2014/15 2.4%, 2015/16 2.6% and 3.0% in 2016/17. The big picture is still one where the domestic economy is struggling to offset the impact of sharply lower mining investment. However near term data has continued to strengthen. Lower interest rates and the AUD (which we have lowered marginally), strong housing prices (especially in NSW and Victoria) and a post-Budget kick in confidence appears to have driven better business outcomes. Against that consumers remain cautious and business remain reluctant to hire. It is difficult to assess the impact of recent international events such as Greece and more importantly China – especially equity market volatility and further falls in commodity prices.